Golden rule

MARKET INSIGHTS

Golden rule

Investors are back on board with gold rush as forecasts shape up for miners and explorers

BARRY FITZGERALD

After enduring a horror June quarter along with the broader market, the ASX gold stocks are back in favour with investors.

Investors are looking to exploit the disconnect that has opened up between gold stock prices and a resurgent gold price.

The industry is still grappling with inflationary pressures which are squeezing margins, and that has necessarily forced analysts to rein in their share price targets.

But given the consensus that the June quarter sell-off was overdone, the upside in share price targets nevertheless remains substantial.

The storm before the calm

Gold stocks were smashed when the gold price plunged from its March high of $US2,078/oz to as low as $US1,683/oz during the broad equity market sell-off in response to rising interest rates in the global fight against inflation.

But the more recent signals from the US Federal Reserve that the scale and pace of further interest rate increases would need to be balanced against their recessionary impacts has forced a retreat in the US dollar from 40-year highs, underpinning a rebound in the gold price to more than $US1,760/oz.

At current levels the gold price is just shy of its average for (calendar) 2021 of $US1,799 an ounce. So

The forecast upside ranged from 17% for Ramelius (ASX:RMS) to 62% for Westgold (ASX:WGX), while the laggards were Evolution (ASX:EVN) (6% upside), and Capricorn (ASX:CMM) (down 3%), with the latter a victim of its leading share price performance in the past 12 months rather than a negative assessment of its gold producer credentials.

Similar upside value is also being identified in the gold developers and explorers, again despite valuations being pulled back because of the cost pressure on new mine developments and gold’s price fall from the March high when Russia’s invasion of Ukraine was front of mind for investors.

Analysts at Canaccord ran the numbers on the 14 developers and explorers it follows at the end of July, using a gold price expectation

despite the massive value hit in nearly all asset classes in the June quarter, gold has lived up to its ‘safe haven’ status.

The rebound in the gold price has yet to fully work its way through repairing the share price hit gold stocks endured during the equity market turmoil and the yellow metal’s brief period of weakness.

But July showed clear signs that investors were wading back into the sector.

Here’s who’s shining

Some of the best performing stocks in the ASX200 during July were gold producers, including St Barbara (ASX:SBM) which gained 42% in the month, Gold Road (ASX:GRR) (25% higher), and

Regis Resources (ASX:RRL)

(26% higher).

Analysts are forecasting that the return of investors to the sector in light of the improved macro backdrop for gold drop could drive similar over-sized gains across the sector.

And that is despite the margin squeeze from inflationary cost pressures and the lingering impacts of COVID-19 labour and supply interruptions.

It is a subject Macquarie’s equities desk tackled during the Diggers & Dealers conference in Kalgoorlie in early August, and Macquarie says it still found substantial share price target upside for 8 of the 10 producers it follows.

Barry FitzGerald

Gold bullion bars

“Despite the massive value hit in nearly all asset classes in the June quarter, gold has lived up to its ‘safe haven’ status”

for 2023 of $US1,826/oz.

Development cost pressures and its lower gold price forecast – it was down from $US1,971/oz previously – prompted a 22% share price target cut for the developers it follows, and a 26% cut for explorers.

Even so, the share price targets across both developers and explorers were substantially higher than ruling market prices.